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What Public Company Directors Should Know in 2014

Being a public company director today is exponentially different than it was just a decade ago.  Rules and regulation changes and increasing investor activism make navigating corporate governance duties more challenging and time consuming.
 
As the New Year approaches, law firm Akin Gump provides a list of 10 topics that will be important for directors in 2014.  For current directors, or those seeking board positions, and for corporate officers who directly interact with the board, it’s a good summary of what to be prepared for.  Below are a few of the more noteworthy topics:
 

  • Address Cyber Security.  Akin Gump cites a recent study by the Ponemon Institute, which found that “in the past year the number of successful cyber attacks on companies surveyed jumped 42 percent compared to the prior year.”  According to CFO Magazine, companies need to better understand the risks posed by cyber attacks including potential lawsuits, reputation damage and customer losses, as well as growing regulatory scrutiny over the adequacy of data-security measures.  Actions have been brought against more than 40 companies by the FTC for data breaches (saying that “failures to prevent unauthorized access to consumers’ information constitute unfair or deceptive acts.”)
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  •  Set Appropriate Executive Compensation.  While some think say-on-pay will remain a hot button issue, others, like CNBC senior editor, John Carney, believe that say-on-pay failed with 97 percent of U.S. companies receiving shareholder votes supporting their executive pay packages through the first half of 2013, according to Equilar.  Even so, it’s apparent that shareholders and proxy advisory firms are continuing to focus on pay-for-performance, while investor activists are targeting disparity between pay for executives and other employees.  In fact, the SEC recently proposed a new rule that would require publicly traded companies to disclose the ratio of its CEO’s pay to the median compensation of its employees.
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  • Determine Whether the CEO and Board Chair Positions Should be Separated.  CFO Magazine reports that during the 2013 proxy season, requests for an independent board chair were the second-most-frequent shareholder proposals submitted to companies.  According to the 2013 Spencer Stuart Board Index, 45 percent of S&P 500 companies split the CEO and chairman roles, up from 23 percent 10 years ago.
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  • Cultivate Shareholder Relations.  Activist investors are here to stay.  Akin Gump says that proxy fight announcements are now at their highest level in four years. Even large pension funds are getting in the act. By knowing and actively engaging shareholders, directors can develop stronger relationships and management credibility, both of which come in handy when facing a potential proxy battle.  Equally important, and the main tenet of any good investor relations program, is keeping your message consistent.  Whether speaking with an activist, a friendly long-term investor or a mom and pop shareholder, the message should be the same.  It’s also important to determine how involved directors should be in the shareholder communications process. This is a company-by-company decision with current viewpoints varying widely.

 
The public company director position can be very rewarding by helping shape a business’s future, but it’s definitely not an easy task.  Regulatory bodies, proxy advisory firms and the investment community are keeping a sharp eye on what’s happening in the boardroom, so these directors must stay on top of the issues that matter most to shareholders. 
 
– Laurie Berman, lberman@pondel.com
 
 

To Guide or Not to Guide

Should companies provide financial guidance to the investment community?  That is the age old question, at least in investor relations circles.  Ask 10 CFOs and you’ll probably get 10 different answers. Add 10 IROs to the mix and now you’ll likely have 20 different answers.  As usual, there is no one size fits all solution.
 
A Skadden, Arps alert debated the pros and cons.
 
Pros:
 

  • Gives analysts reliable data points from which to assess their own projections.
     

  • Reduces investor uncertainty.
     

  • Potentially averts trading volatility.

 
Cons:
 

  • Encourages short-term thinking.
     

  • Creates disclosure issues.
     

  • Distorts investors’ perceptions.

 
Chad Stone, CFO of Renewable Energy Group, told CFO Magazine that “Offering an indication of our expected performance creates an opportunity for investors and analysts trying to understand and model our business.”  He believes that the absence of quarterly guidance would make it difficult for the investment community to understand how his company will perform.
 
Stone is not alone.  A survey by the National Investor Relations Institute found that more than three quarters of those who responded continue to provide
financial guidance.  Of those, 37 percent give quarterly earnings guidance and 39 percent give quarterly revenue guidance.
 
On the other side of the debate, Diane Morefield, CFO of Strategic Hotels & Resorts, believes that quarterly guidance is too short-term focused.  “I would simply hate being boxed in by guidance every three months,” Morefield told CFO Magazine.
 
Many NIRI members agree.  The number of companies providing some type of financial guidance has fallen from 81 percent in 2010 and 85 percent the year before.
 
As a big proponent of transparency, and making it as easy as possible for the investment community to understand your business and financial expectations (especially true for micro-cap companies), I am firmly in the guidance camp.  Whether it’s a revenue range for the quarter or year, point guidance for EPS, or a qualitative discussion of the trends likely to impact future performance, some information is better than none in getting stakeholders on the same page and managing expectations.

 

Laurie Berman, lberman@pondel.com

Wage Disparity Rages On

Women's salaries are still lower on average than men's

Women’s salaries are still lower on average than men in the same career

A recent study by GMI Ratings showed a $215,000 disparity between the salaries of male and female CFOs.
 
CFO Magazine noted that the study looked at several factors that impact CFO pay, including company size, market cap, age and tenure in the position.  Total average compensation for the men, including salary, bonus, and stock awards, was $1.54 million versus $1.32 million for women.
 
Why do women earn less?  Is gender discrimination at play?  One of the study’s authors surmised that, “It is possible that women are more likely than men to advance through promotion from within a single company.  Many firms tend to pay more when making outside hires, which could lower women’s compensation levels.”  The report also cited possible shorter work histories for women, even when they are the same age as men, because they are more likely to interrupt their careers to raise children.
 
SteveTobak, a consultant and contributor to CBS, has some ideas of his own.  He believes that, among other things, women and men may not negotiate in the same way and that compensation is a complex discussion at the CFO level. He also noted that women and men may not be similarly motivated by the same factors, with women weighing non-compensation factors such as work flexibility, security and benefits more heavily than men.
 
Based on 2010 census data, Bloomberg recently reported that the six jobs with the largest gender gap in pay are in the financial sector, with women earning 55 to 62 cents for every $1 made by men.  However, it appears the gender gap is starting to close with the median-pay disparity for all occupations at 77 cents for every $1 earned by men, an improvement from 61 cents during the last 50 years.
 
Whatever the reason for the inequality, the debate about why it exists rages on.  While on the surface it certainly seems that men and women should be paid the same for the same job function, there are clearly many factors at play.
 
If you’re a woman who wants to earn more than your male counterpart on Wall Street, Bloomberg recommends (tongue in cheek, of course) that you set up a shoe-shine stand in Lower Manhattan. Female personal care and service workers earn $1.02 for every $1 made by their male colleagues. Go figure.

 

Laurie Berman, lberman@pondel.com